The New Strategic Thinking

By Michel Robert

Bestselling author Michel Robert gives you his trademark pure and simple rules for developing solid business strategies

In this anticipated follow-up to his previous bestsellers, management expert Michel Robert unveils his practical and proven methodology for you to plan and implement effective corporate strategies. Featuring a detailed explanation of how Robert used his approach to turn around Caterpillar as well as case studies of leading companies that utilize Robert’s method, The New Strategic Thinking shows you how to assemble a strategy team, identify your company’s driving force, determine the focus of the strategy (product, customer, or market), and launch initiatives company wide.

• Language: English
• Publisher: McGraw-Hill Education
• Release date: Aug 10, 2005
• ISBN: 9780071785754

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Robert

PART ONE

CHAPTER 1

THE CATERPILLAR STORY: HOW THREE SUCCESSIVE CEOS USED STRATEGIC THINKING TO REGAIN SUPREMACY

For 60 years Cat was a rocket. This company could do no wrong. Then in the early eighties, our business underwent profound change. We had 60 years, all very successful, in which we built what we said the customers wanted and needed. Then the whole ballgame had changed, said George Schaefer, CEO of Caterpillar (Cat) from 1986 to 1990. Recognizing that his company was in grave danger, he set in motion one of the most remarkable turnarounds in history.

Boosted by a worldwide infrastructure building boom for most of the twentieth century, Caterpillar had been a seemingly invincible juggernaut. Anchored by a vast network of Caterpillar dealers in all of the growth areas of the world, Cat had the products, distribution, and service to dominate the global market for earth-moving equipment and spare parts. Cat also had been able to support that network with the right components—knowledgeable and dedicated people, extensive global manufacturing, a huge field population of machines and engines, and service facilities within easy reach of customers literally everywhere.

But like the Big Three automakers in Detroit, Caterpillar was caught by surprise in the early 1980s when new offshore competitors began to arrive on the scene with high-quality products and disruptive marketing and sales approaches. The biggest threat among Caterpillar’s new rivals was a Japanese company called Komatsu. Eat the Cat had been Komatsu’s war cry since its inception in the years after World War II. Komatsu’s plan, which it methodically implemented, was to circumvent Caterpillar’s service advantage by making machines that don’t break down, thus rendering the leader’s key strategic capability irrelevant.

By 1986, the little-known Komatsu was succeeding in their plan. Working tirelessly to undermine the strategic strength of Cat’s dealers, they made significant inroads in convincing heavy equipment owners that Komatsu’s new equipment did not break down as often and needed far less service than Caterpillar’s—and was therefore less dependent on a local dealer to keep operations running. Their strategy had effectively changed the rules of play in a market Cat had ruled as long as anyone could remember. Further crippled by a widespread building recession that had taken place in the early eighties, Cat was in trouble.

But as impressive as Komatsu’s feat may seem, the fact is that they had not really done anything particularly brilliant. The Komatsu attack was actually made possible by previous Caterpillar executives in the 1970s as they lost sight of the strategy that had made Caterpillar successful for so many decades. Throughout its first 60 years, Caterpillar had been practicing what we at DPI call a Product-driven strategy. The bottom line for a company whose strategy is focused around a single product (heavy earth-moving machinery, in Cat’s case) is very simple: the best product wins. As such, resources need to be continually reinvested so a company can ensure that its products are always the best.

In Caterpillar’s case, the leaders had forgotten what had put them out in front all those years. And as Cat was generating more cash than the company needed in the 1970s, management became distracted by this development and began looking for a big acquisition. They found one in a company called Towmotor. Caterpillar management rationalized that moving material—Towmotor’s business—was very similar to their own business of moving dirt.

That assumption proved to be very wrong and very costly over the next decade. The strategies of Caterpillar and Towmotor were incompatible, a mismatch that undermined both businesses, leading to huge losses and depleting Cat’s strategic advantage.

THE CAT AWAKENS

Fast-forward 10 years, and the impact of the Towmotor acquisition combined with the attack by Komatsu had taken its toll. This was in the late eighties, said Don Fites, Cat’s CEO from 1990 to 1999, who was president at the time. "We’d experienced a decade without really any shareholder value being created … we were very concerned about our Japanese competitors. When I joined this company, all of our competitors had been American companies—and most of them were put out of business by the Japanese and Europeans, who are fierce competitors. Survival was a word that we were talking about around here."

As U.S. competitors such as International Harvester succumbed one by one to this new environment, Cat management could find no clear path to regaining its growth of the past. Not that they didn’t try.

A lot of people had written us off, as they had many American ‘Rust Belt’ companies, says Caterpillar CEO Glen Barton (2000-2004), who at that time was running the Solar Turbines division. "We went through a period of time in which we closed a lot of factories and tried to become a low-cost source, not necessarily to compete on price, but to make a profit on the prices at which we were already selling our products. We still wanted to concentrate on selling value, and we still do that today. We believed, and still do, that our products have more value than our competitors’ offerings, with the combination of performance, reliability, resale value of the product, and the ultimate life of the product. We have that distinct advantage today. But, in order to compete, then we had to sell our products at a price where we couldn’t make any margin, and obviously, we couldn’t do that forever.

Komatsu had been making inroads outside the United States, not much inside the United States, Barton recalls. When they started taking us on in the home market, we bit the bullet and decided that we had to maintain our market position regardless of circumstances, until we could get our own house in order, which we then embarked upon doing.

Cat’s management went about the task of seeking the best advice on strategy it could find among America’s top business minds. As Barton remembers, We went through a number of different consultants who worked with us. Among several others, we had the top strategy consultant at the time, Michael Porter, and Noel Tichy, who was a facilitator that had worked with General Electric on their breakout process. At the same time we were in the process of visiting other corporations to see what they had done and what guidance they could provide us.

None of these efforts yielded useful answers, as red ink continued to mount. As George Schaefer put it: We were floundering despite help from the top consultants available. We had too much good advice.

Recalls Barton: Somewhere or other we came across Michel Robert’s book that talked about the Strategic Thinking Process. We were all impressed by the simplicity of his approach. Rather than spending two or three years getting the background material, as a traditional strategy consultant like Michael Porter might have wanted to do before he was ready to move forward, we felt that the DPI process was a much more straightforward approach. It was one we believed we’d feel comfortable working with and get faster results, which at that time was important.

Schaefer’s team believed the Strategic Thinking Process might be the tool they needed to mine the hundreds of worker-years of experience residing right there in the heads of their people in Peoria. They reasoned that creating their own strategy based on that knowledge would lead to a better strategy than one based on studies done by outsiders. But more than anything else, Schaefer, as CEO, was determined to find a way to gain consensus and commitment to a strategy that would revive the struggling Cat.

STRATEGIC THINKING COMES TO PEORIA

So a call came into DPI’s offices from Caterpillar asking me to go to Peoria and make a presentation to the executive committee. Of course I accepted, and during the presentation I asked them to tell me Caterpillar’s bumper-sticker strategy statement. One of them replied that it used to be earth-moving machines but that it had been changed to earth-moving and material-handling machines. I then asked them if the addition of the words material-handling had been made before or after the acquisition of Towmotor. There was a dead silence in the room and I thought that surely the question had just cost me an opportunity to work with Caterpillar. But they were wiser men than I was giving them credit for. They understood the meaning of the question and the implications of their tacit answer, and decided to proceed with our process.

Says Glen Barton of that first session: "I will always remember a comment Mike Robert made to us at the meeting, that 90 percent of what we needed to know to restructure our business was already in the heads of the people in that room. And I think if we contrasted that with Porter’s approach, he would have said that less than 5 percent of what we needed to know was in the heads of the people in our company. Mike’s point hit home with us.

The idea of going out and doing a lot of surveys of individual market segments and collecting a lot of information about customer groupings and logical fits of customer groupings didn’t appeal to us at all. We’d already done some of that, and it didn’t work all that well, says Barton. Some of these projects never end, they just keep rolling along and become bigger and bigger, and longer and longer, and more involved. I think we all welcomed and still appreciate the fact that there’s a finite course that you go through with DPI. In the last 10 years, we have used the Strategic Thinking Process many times and when we undertake it we know that there’s an end. When we get to the end, there are decisions we’re going to make and directions we’re going to take and move on from that.

A MEETING OF THE MINDS

Caterpillar assembled an exceptionally strong team of senior managers to go through the process, among them the three men who would be Cat CEOs through the next 15 years—George Schaefer, Don Fites, and Glen Barton.

Very quickly, during the initial Strategic Thinking session, it became clear what had gone wrong in the business. Cat, they realized, had gradually grown complacent over the years, neglecting to nurture the fundamentals of its Product-driven strategy. And the acquisition of Towmotor had dragged the whole company off its course.

Through the logic of the process, Caterpillar executives quickly discovered that moving dirt was generally a horizontal operation, while handling material was generally a vertical operation. It also became apparent that the skills required for each business were completely different and most were not transferable from one business to the other. Just about everything about the two strategies was different:

• Manufacturing processes

• Customers

• Distribution methods

• Selling methods

• Service requirements

• Design factors

• IT requirements

• Suppliers

• Competitors

The clash of the two fundamentally different strategies was dragging both parts of the business down into the mud. Enormous amounts of cash were diverted to make up for the losses in the material-handling division. Product quality lagged, and service had lost touch with the real needs of its customers. Even worse, as part of an attempt to pay for Towmotor and cover the losses that began to occur immediately after the acquisition, Caterpillar management made a nearly fatal decision. They reduced the Product Development budget from a high of 7.8 percent of sales to about 1 percent of sales. This gutting of R&D crippled Caterpillar’s ability to continue making the best product, giving Komatsu the opening it needed to close the gap between the performance of their machines and Caterpillar’s. The good news was that it also quickly became obvious what they needed to do to reestablish their product-driven dominance.

Said Schaefer: Mike and his process helped us sort everything out. We knew that we were moving in a more orderly and focused fashion. We saw it all: businesses entered without commensurate expertise, misunderstood market share, and so on. It was priceless. Noses got bent out of shape … but when noses get bent out of shape, you generally get better decisions.

Recalls Barton: One thing that impressed us as we moved through DPI’s process was the fact that, first off, it was excellent to have such a skilled facilitator. With all the people who had worked with us before, we would come up against a touchy issue and we’d get stuck. I think that one of the things we learned was that having a strong facilitator is very good for moving the meetings forward and keeping us talking, even though we would come up against a roadblock from time to time. These were sometimes very sensitive issues to a lot of people, and the directions that the group might decide to go were maybe disappointing to certain individuals within the group. But Mike drove the process, drove us through considerations of what kind of company we wanted to be, whether we were Product-driven or a Market-driven company, or a Technology or a Production Capability-driven company. We logically arrived, through the process, at what we thought we were and what we still think we are today, which is a Product-driven company. That helped us a lot as we moved forward in trying to strategize how we could better organize this Product-driven company to serve the needs of the marketplace.

Schaefer saw the recognition of Caterpillar’s Driving Force as the turning point in Cat’s strategic awakening. It helped us to understand our options and alternatives, he said. This was critically important to helping us understand our strengths and weaknesses, and to delineate the Critical Issues for the next decade. The discipline of the approach gave us the confidence that we were right on track.

DIFFICULT AND COURAGEOUS DECISIONS

During that work session, Cat’s management team made a number of what have proven to be historic decisions for the company. By recognizing their Driving Force and the related Areas of Excellence, concepts we will talk more about later, Cat’s senior management team had no trouble deciding on the following actions:

• To divest themselves of Towmotor and take a loss of nearly $300 million

• To remain a U.S.-based manufacturing company due to the fact that moving their 14 Illinois plants abroad would have been a major blow to the economy of that state

• To invest $2.5 billion in a program named PWAF (Plant With A Future), which was intended to significantly reduce costs by a factor of 10, converting their batch-oriented plants into fully automated ones

• To restore the Product Development budget to the previous level of nearly 8 percent of sales and rededicate themselves to making and selling the best product

• To refuse to accept a labor contract patterned for the automobile industry and not to Caterpillar’s distinctive needs, and to accept a union strike if need be

• To be profitable at the bottom of the trough. Caterpillar, historically, had suffered wild swings in its profit results, with the price of its shares following suit—reaching record highs during good economic times and record lows during economic downturns. During that first work session, they decided they needed to be profitable all the time.

All of these decisions, Cat’s Critical Issues, were implemented between 1987 and 1990, and their impact on Caterpillar and its shareholders was nothing short of spectacular, as Don Fites said at the time.

Fites, who took the CEO reins in 1996, recalls: "The first sessions were an honest, hard look at who we were, how we were organized, and how we were going about doing business. It’s a difficult process. It’s easier to have somebody else tell you what you are and what needs to be done. In our case, though, I think this process was exactly the right approach to take, because ours is a company where most of the people spend their lifetime.

"We’re very attached to the business and the equipment. We know the market and the customers. We know the business very well, and it’s not a business that is easy to grasp. I mean, there aren’t a whole lot of companies—there aren’t really any companies—in the world like Caterpillar. We don’t have any models to follow. Forcing us to do that assessment was exactly the right thing, because only we, in the end, could have made that assessment, arrived at the conclusions, and taken the path that we eventually did.

I think that the idea of someone from the outside telling people who have spent their whole life in a company that something will or won’t work is not really a good idea. They don’t have the insight into what really makes the company tick. I think the thing that this process does very well, and I’ve seen it done over and over again in different circumstances, is it forces you to come up with the good news and the bad news. And you find the answers to these issues yourselves.

CAT FIGHTS BACK

Immediately after the first work session, Fites had an inspiration: Could the 20 people at Caterpillar with the greatest knowledge of Komatsu use DPI’s Strategic Thinking Process to determine Komatsu’s strategy and develop an anti-Komatsu plan?

With a bit of reverse engineering of the process, the new team went to work. Caterpillar learned more about Komatsu in the first few minutes of that session than they had in the previous 30 years. The guts of the discussion revolved around the concept of Driving Force. By looking at the scope of Komatsu’s products, including those that do not compete with Caterpillar, such as robots, elevators, and machine tools, it was decided that Komatsu’s Driving Force was technology—namely hydraulic technology. In other words, Komatsu was in Caterpillar’s sandbox simply because it was another place to exploit their hydraulic expertise.

That discovery led Caterpillar to develop and/or acquire a host of other technologies to reduce the importance of hydraulics in their machines. By going at the very essence of Komatsu’s strategy and neutralizing it, Caterpillar regained its advantage, and it went on to reestablish its supremacy in the earth-moving sandbox.

BUILDING THE NEW CATERPILLAR

One of the most significant moves resulting from Cat’s new strategy, in Glen Barton’s view, was a major restructuring of the company. The need was clear, but the implementation plan took a bit more discussion.

Two new units were created immediately, but it took a firm shove from an influential board member, who, seeing the wisdom of the conclusions reached in the DPI process, pushed them to compress their timeframe for a complete reorganization.

Barton remembers how it happened: "We were creating the divisions. After a lot of debate we got eight or nine people to pretty well agree on what we thought the different divisions of the company should be. We got the executive office at that time to buy into that. Lou Gerstner (the ex-IBM CEO) was on our board. At that point he was still with American Express. We had created the first two divisions, and Lou asked the question at a board meeting, ‘When do you intend to go forward with the reorganization of the rest of the company?’ And, frankly, within the company at that point in time, within the executive offices, there was a three/three split in terms of whether we should go forward with the whole reorganization of the company at once or whether we ought to wait until we had some experience with the first two divisions before we proceeded with the balance. So Lou spoke up again, as only Lou can do, and said, ‘Look guys, my biggest concern is that you’re going to reorganize this company over a two- to three-year period of time and find yourselves organized differently but operating in the same manner that you’re operating today. The only thing I can say to you is that if you’re going to cause people to change the way they do things, you’ve got to follow through on this plan you’ve made and reorganize the whole company at the same time.’ We moved forward and we never looked back.

I think the reorganization is the most significant thing that has happened as a direct result of the DPI process and I think we had a total turnaround in our company in recent years as a result of it, Barton states.

Said Fites: We completely restructured our company from what was essentially a functionally organized company into profit-center divisions and service divisions. Originally there were 18, and then 23. We completely distributed accountability and responsibility down into the organization from what had been a structure where virtually all important decisions were made by a few people at the top. We drove the accountability and responsibility broadly into these divisions, held them accountable for their own plans.

Caterpillar’s sheer mass would mean, though, that the transition would not be an easy task. At the end of the decade of the 1980s when the implementation of the new strategy began, Caterpillar was doing business in more than 200 countries, with 32 plants in 12 countries, employing more than 60,000 people. In addition, its network of some 190 dealers was spread throughout the globe. Turning around a company of that enormous size is akin to turning around an ocean liner. It takes time, planning, and the coordinated efforts of a lot of committed people to change the inertia. By driving the strategy and related decision making more broadly and deeply in the organization, the transformation would be less top-down and would happen much more quickly.

During the strategy sessions with DPI, a set of 13 Critical Issues was created, with individual executives taking ownership of each, to assure steady, determined progress. To make sure that each of the newly created units had a plan it could execute in sync with the corporate strategy, each SBU went through the Strategic Thinking Process.

Once we got ourselves organized corporately, a lot of the people who are running these divisions had been involved in the first sessions or were aware of the work that had been done. They immediately began using the Strategic Thinking Process to flatten their own organizations and also to do a self-assessment on a more micro basis of what they were and what they were trying to do. The goal was to cascade the strategy concepts down through every level of the organization so it could eventually move forward as one.

As the years rolled on, those plans created in the corporate unit strategy sessions and, subsequently, the business unit strategy sessions became realities, restarting the engines of long-term growth. The days of facing extinction became a distant, though chastening, memory in Peoria. The results in the years immediately following Cat’s strategic rebirth were nothing short of phenomenal. In fact, in 1997 the Wall Street Journal ranked Caterpillar number three of all the companies it tracked in five-year average shareholder return—at 29.8 percent.

As Fites described the turnaround at that time: "As far as the shareholders are concerned, the creation of shareholder value has been rather spectacular. But also from a customer standpoint, the acceptance of our products from around the world is at an all-time high. Our product development process is working better than ever. And now, instead of having seven people at the top of the organization trying to come up with all of these ideas on how we’re going to grow, how we’re going to be successful, we have thousands of people in the organization coming up with all sorts of ideas. Our job now at the top of the company has changed—we’re put in the position of choosing and picking the best ideas. We’ve got more growth opportunities identified than we really want to try to implement.

I think it is one of the truly remarkable success stories of the 1990s. The track record is there in terms of financial results, market shares … percentage of sales … the whole nine yards.

By 1996, with competitors such as Komatsu and Hitachi still there and battling tenaciously, Cat’s sales had risen to a historical high of $16.52 billion from about $8 billion in 1989, and its record profit reached $1.36 billion. Exports were the highest in company history, at $5.5 billion. Cat had, after a brush with extinction, landed squarely on its feet. But the job wasn’t complete. When they undertook the Strategic Thinking Process,